| From: | "J.D. Falk" <jdfalk@****.CAIS.COM> |
|---|---|
| Subject: | Cybereconomics, cont. 2 (fwd) |
| Date: | Thu, 26 Jan 1995 17:36:33 -0500 |
---------- Forwarded message ----------
Date: Thu, 26 Jan 95 14:05:01 EST
From: QUANTALYT@***.com
To: Multiple recipients of list <digitaliberty@*******.com>
Subject: Cybereconomics, cont. 2
Continued.
paths traditionally looked at by taxing and monetary regulatory authorities.
Thus, we now have the means to develop a completely parallel world-wide
economy, or at least wherever the Net reaches, without possible successful
intervention by governments. There are several very strong incentives for
individuals and business to do so: no taxes on transactions, including
income tax, sales tax, use tax, excise tax, or tariffs; heightened privacy;
and for users of cybercash in countries with restrictions on owning foreign
currencies, a way to protect assets from depreciation caused by governmental
actions. An excellent example of the need to hedge against government
actions is the recent Mexican financial crisis, which has cost Mexicans
forced to hold Pesos by their government, about 40 per cent of the value of
their holdings when compared to the U.S. Dollar. Untraceable cycash would
have been highly welcome instead of Pesos as a medium of exchange, and of
savings.
With the rise of cycash and a cybereconomy, even if it does not have linkages
initially to the outside world, there will also doubtlessly develop a pool of
savings, and bank-like intermediaries which will take deposits of cycash, pay
interest on them, and lend the cycash out for investments in Net-based
projects. Some examples of purely Net-based projects might be database
programming; database population and quality control; communications setups
such as the creation of World Wide Web pages for business and associations;
database searching; software development; and publications. These
activities are done on computers for computer driven activities. However,
once these types of activities are reasonably well established on the Net,
there will inevitably be a developmental step in the form of "leakage" of
cycash into the physical world for the purchase of computer hardware and
software packages. From this type of linkage we can readily envision a
broader "leakage" into other physical world goods and services, paid for with
cycash.
With the rise of bank-type institutions on the Net, there will also be a
disproportionate increase in fraud, unless investors of cycash insist on
audited financial statements with electronic signature verification of the
auditors. However, this will be difficult to do; most of the "banking"
servers are likely to be either offshore, physically located in areas legally
unreachable to U.S. or other governments' regulatory or tax bodies, or only
available anonymously. Auditing will therefore be difficult to outright
impossible, as will government regulation, as noted above. Therefore, it
will not take long for cyberfraud to develop as new class of crime, without
the legal recourse and punishments available in the physical world. In spite
of this barrier to acceptance, because cycash can be encrypted to insure
authenticity and amount, it will develop as a medium of exchange (money) and
credit.
As these cycash funded financial institutions grow, and as individuals amass
cyberwealth, we can expect to also see an explosion in money supply and
credit, which will also effect the physical world, via the above discussed
"leakage". This, in turn means that at some time in the future, the Federal
Reserve Bank's traditional inflation fighting tools to ration money and
credit will cease to function well. To effect the cybereconomy, especially
in its early days when rapid growth will be the norm (growth rates in excess
of 10 per cent, per annum), the Fed and other central banks will have to
boost rates far beyond what would be necessary to cool off the physical
economy. We envision this happening in the late 1990's, as the cybereconomy
by that time should have a sufficient large internal development that leakage
will be fairly wide-spread.
Because of the central bank authorities' inability to regulate activity on
the Net, the traditional tools of central banking will cease to be very
effective at all probably by the year 2010, by which time the physical world
component of the world economy will be unable to tolerate the type of
interest rates needed to attempt to slow down credit and money growth in the
cybereconomy. Gold and silver, as a result, should make a comeback in the
physical world as currencies and stores of purchasing power. One way to
negate this scenario would be the rise of an oligarchy of cyberbanks whose
cycash is universally accepted, and who also are collectively sufficiently
self-disciplined and in agreement to target money and credit growth levels -
not interest rates on cyberdeposits. Since ANYONE will be able to issue
cycash with various levels of acceptance (assuming that the issuer permits
his cycash to be freely convertible and transferrable), it will not be
possible, in this author's opinion, to target specific levels of rates;
instead, competition from various issuers of cycash will affect the
willingness, or lack thereof, to expand their cyberdeposit bases.
An example of a potential bank and cycash issuer/investor is American
Express, which ironically has its origins in banking prior to the development
of electronic commerce of any kind (e.g., the telegraph). American Express
receives payments from merchants for charges, and makes payments to merchants
from receipts from card members. In theory, given the electronic nature of
American Express's relationship with merchants, American Express could issue
AmEX cydollars to them for at least part of their payments. These cydollars,
in return, would be paid back to American Express by vendors as the
percentage of the member charge. In other words, American Express would not
have to part with U.S. Dollars, and the merchants would have cycash which
initially could only be spent at American Express. However, given the
widespread use of their cards, it would not take long before a merchant does
business with a cardholder, pays the cardholder with AmEx cycash, and the
cardholder, in turn, pays his American Express bill with AmEx cycash. With
cycash, the amount of money in circulation essentially increases by the use
of cycash, totally outside the purview of the Federal Reserve, other central
banks, or the various tax authorities. American Express could greatly
increase the amount of cydollars outstanding by offering convertability to
physical cash. Essentially, it would be an extension of their physical
travellers checks, but with a key difference - the cycash, assuming they
issued it as freely transferable, would be untraceable as it goes from user
to user around the world electronically. With a linkage to redemption for
physical money, just like travellers checks, they could create a universally
recognized and valued currency. Of course, the creation of cycash is not
limited to American Express; I merely hold them up as a model based on their
world-wide scope, their existing foothold in electronic commerce, and the
very wide range and scope of the merchants who accept either the American
Express Card, or travellers' checks.
Until the cybereconomy matures, where maturity can be measured as an economic
growth rate comparable to the physical world's, the correlation between the
expected results of rate targeting by Central Banks in the physical world,
and the cybereconomy, will likely be poorly correlated. The leakage
component will provide some correlation; but sharply higher cybereconomic
growth rates can be expected to cause people to "ignore" the physical economy
in favor of better opportunities in the cybereconomy. This favoring of
economic growth can be expected to hurt the authority of physical governments
and their efforts to regulate economic activity - in the cybereconomy, they
will be ignored as being irrelevant.
